Firm X has a market value of $8,400 with 120 shares outstanding and a price per share of $70.Firm Y has a market value of $2,000 with 100 shares outstanding and a price per share of $20.Firm X is acquiring Firm Y by exchanging 30 of its shares for all 100 of Firm Y's shares.Assume the merger creates $400 of synergy.What will be the value of Firm A's shareholders' stake in the merged firm?

Question

Quizplus · Accepted Answer

First, we need to calculate the total market value of both firms before the merger:

Firm X market value = 120 shares x $70 per share = $8,400 
Firm Y market value = 100 shares x $20 per share = $2,000 
Total market value = $8,400 + $2,000 = $10,400

Next, we need to calculate the value of the merged firm and the number of shares outstanding:

Value of merged firm = $10,400 + $400 synergy = $10,800 
Number of shares outstanding = 120 shares + 100 shares = 220 shares

Then, we need to calculate the exchange ratio:
30 shares of Firm X / 100 shares of Firm Y = 0.3

Finally, we can calculate the value of Firm X's shareholders' stake in the merged firm:
Value of Firm X's shareholders' stake = (120 shares - 30 shares) x $70 per share + 30 shares x $36 per share (since Firm Y's shares are only worth $36 per share to Firm X) 
= $8,640

Therefore, the answer is D.

Firm X Has a Market Value of $8,400 with 120